The premise is simple: If your company’s board of directors does not have equal representation of men and women, we will vote against your incumbent directors.
Plan sponsors and money managers are increasingly flexing their large-dollar muscles and the power of their holdings to align their board votes with their ideologies. It’s part of a worldwide trend to invest responsibly in organizations that have an impact on three criteria: environmental, social and governance (ESG) issues.
We’re especially seeing more plan sponsors focus on the “G” in ESG by scrutinizing who sits on an organization’s board of directors and voting against proposed slates that don’t have female representation. For a long time, organizations, just as many individual investors, likely voted for whomever the board nominated. Now these organizations are taking more activist positions, using their voting voices to send a clear message to leaders on how they should be running their companies.
Recently, our client, the Office of the New York State Comptroller led by Thomas P. DiNapoli, filed shareholder proposals at 33 companies seeking board diversity. The $204.4 billion New York State Common Retirement Fund has adopted a proxy voting policy to oppose all incumbent board directors that have no women serving or nominated to serve on their boards.
State Street Global Advisors will implement the same policy in the United States, the United Kingdom, and Australia in 2020, and in Canada, Europe, and Japan the following year. It will also vote against the entire slate of board members at companies that have not held meaningful dialogue with State Street Global Advisors about its new board gender diversity rules in three years.
And Mercy Health System has created a due diligence-type checklist for asset managers to conduct across all asset classes. It includes questions on senior leadership representation, employee development, and the company’s ESG investment process with a focus on board diversity. According to Chief Investment Officer Magazine, these questions are asked to ensure the company aligns with Mercy Health System’s values.
“Lack of diversity puts companies at a competitive disadvantage. And when companies fail to address shareholder concerns over lack of diversity they demonstrate a lack of accountability,” Mr. DiNapoli said.
McKinsey & Company found in its 2018 study, “Delivering through Diversity,” that companies with more gender diversity on executive teams are 21 percent more likely to outperform on profitability and 27 percent more likely to create value. And Bank of America Merrill Lynch found in its 2018 study, “Women: The X-Factor,” that S&P 500 companies with greater diversity had higher return on equity than companies without.
Their efforts seem to be working, though there’s still a long way to go for total equality. According to the Bank of America Merrill Lynch report, the average S&P 500 board has 22 percent women directors, versus 14 percent a decade ago. But only 11 percent of those companies have at least one-third of board seats held by women, the report says.
Not surprisingly, plan sponsors are starting to take a stance by putting their votes where their mouths are. They are no longer tolerating a lack of diversity on company boards. Their efforts will likely help move the needle on gender diversity -- and, ultimately increased profits -- in the boardroom.